Fitch said on Monday that covered bonds are an important tool and a “mild credit positive” for Australian and New Zealand banks, although it does not expect many further issuers to emerge from the region.

The rating agency noted that the funding instrument allows them to access new investors, longer issuance duration, and a diversification of funding tools, with this being particularly important for banks in the two countries given their reliance on wholesale funding, particularly offshore.

Fitch noted that Bank of New Zealand is an outlier in its use of its potential covered bond capacity, having issued about 70% of the amount it is permitted to, with other major Australian and New Zealand banks having each used about one-third of their available capacity – Australian banks’ cover pools are limited to 8% of domestic assets, and New Zealand banks have a limit of 10% of total assets, with the need for overcollateralisation effectively lowering issuance capacity further. The extent to which they maintain issuance capacity within limits is key to the extent to which covered bonds are a benefit, the rating agency said.

Fitch expects few new issuers to emerge from the two countries given the regulatory limits and that smaller banks that have not issued covered bonds would find it difficult to achieve high ratings. It also said that asset encumbrance resulting from covered bond issuance is likely to remain low due to issuance limits.